I’ve found that contrarian investing, which involves buying out-of-favor stocks, can be profitable, even in down markets.
For instance, last October, I published a column on the topic that recommended four ‘out-of-favor’ stocks. That portfolio averaged a 4.2% return from the publish date (Oct. 8) through last Wednesday (Aug. 9) compared to the S&P 500’s 4.1% loss over the same period.
In recent months, I’ve done more research on the topic and today I’m going to describe a new contrarian screen based on those findings. Here are the details.
• Use Finviz screener: As usual, I’ll use the free and user friendly Finviz stock screening program to build my new contrarian portfolio.
Start from the Finviz homepage (finviz.com) by selecting Screener. Finviz uses “filters” to search for stocks meeting your selection criteria. Select “All” on the Filters bar to see all of the available filters.
• Setting up the screen: For starters, because the U.S. economy is the strongest, limit your choices to U.S.-based stocks by using the country filter and specifying “USA.”
Next, we’ll use analysts buy/sell ratings to limit our list to stocks that are out-of-favor with those analysts. Here’s how.
Although analysts use a variety of terms to describe their buy/sell opinions, Finviz boils them down to “strong buy,” “buy,” “hold,” “sell” and “strong sell.” Except for “hold,” the meanings are self-explanatory. However, to avoid antagonizing company executives, many analysts rate stocks at “hold” when they really mean “sell.” Thus, for our purposes, “hold,” “sell,” and “strong sell” all translate to “sell.”
Thus, specify “hold or worse” using the Analyst Recommendation filter to limit your list to stocks analysts are advising selling.
• Earnings drive share prices: I’ve found that share prices track earnings per share (EPS) closer than any other single factor. However, many analysts don’t seem to agree and forecast strong earnings growth for stocks that they’re telling us to sell.
So, specify “over 30%” for EPS Growth This Year and for EPS Growth Next Year to limit your list to stocks expected to record strong future earnings growth numbers.
• Profitable stocks only: If you’re looking for share price appreciation, you’re always do best limiting your list to profitable stocks both in terms of reported earnings as well as free cash flow.
For earnings, use the Return on Equity filter, which compares Net Income to Shareholders Equity, and specify “Over +5%” to rule out unprofitable stocks.
“Free cash flow” is the excess cash remaining after a firm has paid out all of its necessary expenses. It’s a positive number if the firm generates more than enough cash to cover expenses, and a negative number if it doesn’t.
Since Finviz doesn’t directly offer a free cash flow filter, specify “Over 5” using the Price/Free Cash Flow filter which can only be true when free cash flow is a positive number.
• Make the trend your friend: Finally, since stock prices tend to move in trends, it’s best to start with uptrending stocks. So, using the Performance filter, specify “Month +10%” us to limit your list to stocks that have moved up at least 10% over the past month.
• Five contrarian plays: My screen turned up five stocks when I ran it on Wednesday.
CBTX (CBTX), EnLink Midstream (ENLC), Live Oak Bancshares (LOB, Pinterest (PINS), and Yelp (YELP).
These are my ideas, but do your own due diligence. The more you know about your stocks, the better your results.
Harry Domash of Aptos publishes the Winning Investing and the Dividend Detective websites. Contact him at www.winninginvesting.com or Santa Cruz Sentinel, 324 Encinal St., Santa Cruz, CA 95060. To see previous Domash columns, visit santacruzsentinel.com/topic/Harry_Domash.
